I'm Contributors Editor at TheStreet.com, a business news, market data and stock analysis website. I was Editorial Director of Digital Book World, a website dedicated to covering the world of e-books and digital publishing. I've been a reader since 1986, a journalist since 2005 and an e-reader since 2011. I live and work in New York City.

Should The U.S. Government Be Allowed To Run The Ebook Industry?

I think we can all agree that there are some things the U.S. government is better at than any other business or institution. Like, for instance, raising an army and building high quality roads stretching across the country. So, I ask the question, is one of the things we should leave to the government the operation of the ebook industry?

In 2012, the U.S. Department of Justice sued AppleApple and five of the largest U.S. publishers for colluding to fix the prices of ebooks. Eventually, all five publishers settled, cutting deals with the DOJ to operate in the market in a certain way. They all agreed to a similar deal: Tear up their contracts with ebook retailers and sign new ones that more or less followed guidelines the government set out. The publishers were required to forswear controlling the price consumers paid for ebooks for two years (known as “agency pricing”) and barred from signing contracts with “most-favored nation” clauses for five years. The retailers had only to make sure that they didn’t lose money on each publisher’s business, which was basically a safeguard against predatory pricing by retailers (undercutting the competition and attempting to drive them out of business by pricing ebooks at a loss).

The publishing industry, for the most part, didn’t like this deal but the publishers themselves signed on for lack of options. Even if they didn’t lose at trial, it would be a costly court fight and for the largest trade publishers — still rather small companies by global standards — the risk of losing was too much to bear. Macmillan, for instance, settled only after its lawyers informed it that the company might go under if it lost in court.

Fast forward to this summer. Apple goes to trial alone against the DOJ, claiming that it did not collude to fix the prices of ebooks. The Judge didn’t agree with the company’s point of view and Apple lost. The Judge has yet to determine what punishment will be applied — a “remedy” in legalese. As was expected, the DOJ weighed in on what the remedy should be. The DOJ’s recommendation would be an audacious remaking of the ebook publishing business as well as much of the digital content industry in the U.S. and around the world:

– No agency pricing on ebooks and content sold through iTunes and the App Store for five years – No most-favored nation for 10 years – Allow Apple apps to link to outside online retail stores – Allow Apple apps to make retail sales within an app without Apple taking its customary 30% commission – Retailers can maintain any pricing strategy they wish, within the bounds of the law (which would mean they wouldn’t necessarily have to make a profit off of any one publisher’s business)

Should the Judge approve these measures, it would reshape not only the ebook industry but the content industry.

Amazon, Barnes & NobleNoble and others will start selling ebooks through their iOS apps, I would assume. Apple would have to change how it retailed apps and other content like music and TV shows. Instead of the prices being set by the publisher of the content, Apple would set the prices (and have to develop a strategy around that). For ebooks, I think it’s safe to say that we’d see increased price competition, likely with Amazon leading the way with discounting, as has usually been the case. We might even see best-sellers priced as low as $0.99 — or lower, as we’ve seen in the UK with price promotions led by SonySony but matched by other retailers.

Publishers, which settled with the DOJ in the past year thinking they were submitting to one deal, would now be subjected to Apple’s punishment. They would not be able to sign new agency contracts with Apple for five years from the start of the remedy. In the case of HarperCollins, this would be about six years from the original settlement.

While this would undoubtedly make ebooks cheaper for consumers in the short term, the long-term effects are harder to predict. Would one retailer take so much market share that this kind of price competition would cease to be relevant? Would publishers lose so much of their print business (due to unfavorable comparisons to ebook prices) that they would have to change their business models? Would it hasten the demise of bookstores and with it the entire print ecosystem? Would things continue to progress along the same route they have been for a some time now (the slowdown of ebook adoption and some sort of equilibrium hitting the market)?

One thing is certain: It would be an astounding intervention in the market by the government.

Is it warranted? Is it needed? Would it be a good thing for consumers? For the industry? That’s for Judge Denise Cote to decide, as it is expected she will soon (pending appeal by Apple).

What do you think: Is electronic media an industry where the government knows best?

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